Disclaimer (Read carefully) SUGGESTED ANSWERS - Group 1 Taxation (Code GST) The answers given below are prepared by the faculty of Samvit Academy as per their views and experience. The working notes, notes and assumptions, if any stated, are purely the views of the respective faculty of Samvit Academy and students are encouraged to go through them and apply the same in the examination as a good practice. No assurance is given that the answer keys of the Institute of Chartered Accountants of India used for valuation are the same. However, utmost care has been taken while designing the below suggested answers. For the questions, please refer to the question paper. Solutions are for AY 2018-19 in direct tax and in GST, notifications up to October 31st have been considered. Part A: Income Tax (60 Marks) 1. Computation of total income and tax liability of Mr. Dinesh Karthick AY 2018-19 WN Rs. 1 2 3 Income from house property (WN 1) Profit & gains from business or profession (WN 2) Income from other sources (WN 3) Gross Total Income Less: Deduction under Chapter VI-A (WN 4) Total Income Levy of Interest u/s. 234A 4 52,500 9,85,000 74,000 11,11,500 (1,12,000) 9,99,500 In the question, the gross turnover of the business of the assessee has not been furnished. However, it is informed that the firm in which he is a working partner paid salary of Rs. 90,000 representing 0.75% of firm sales. Thus, the turnover of the firm should be Rs. 1,20,00,000. Since it exceeds Rs 1 Crore, the firm is subject to tax audit u/s. 44AB of the Income - tax Act, the return of income of the firm shall be filed on or before 30 th September. Accordingly, the working partner's personal return of income also should be filed on or before 30th September. In the given case, the return of income was stated to be filed 3rd October, 2018, which is after the due date for filing return of income. Therefore, interest u/s. 234A shall apply as taxes have been not paid within that date. Levy of Fee u/s 234F Since the return is filed after the due date u/s 139(1) but before 31st December 2018, the fee u/s 234F will be Rs 5,000. WN 1: Income from house property Arrears of rent received - Taxable u/s. Sec. 25A Less: Deduction @ 30% Income from house property Rs. 75,000 (22,500) 52,500
WN 2: Income under the head "Profit & gains from business or profession" Rs. Rs. Net Profit as per P & L Account 4,32,000 Add: Inadmissible Expenses (i) Advance Tax Sec. 40(a) (ii) Personal expenses of car (50,000 x 1/5) (iii) Bonus paid - Sec. 43B (assumed that only Rs. 15,000 paid before the due date) (iv) Depreciation on car & machinery charged to P & L Account Less: Allowable Expenditure (i) Depreciation (WN 5) Less: Income taxable under other heads/ exempt incomes (i) Agricultural Income exempt u/s 10(1) (ii) Interest on Fixed Deposits (Net) taxable under IFOS (iii) Pension from LIC taxable under IFOS Total Income from Partnership firm Interest on capital - taxable only to the extent of 12% as the balance 3% is disallowable in the hands of the firm u/s. 40(b) 70,000 10,000 33,000 4,25,000 60,000 45,000 24,000 (A) 5,38,000 (1,86,000) (1,29,000) 6,55,000 2,40,000 Partner's remuneration - (Note 1) 90,000 Total (B) 3,30,000 Profits & gains of business or profession (A) + (B) 9,85,000 Note 1 In a case where the partnership deed does not specify the amount of remuneration payable to working partner or it does not lay down the manner of quantifying such remuneration, the amount of remuneration shall be disallowed in the hands of the firm. Where remuneration is disallowed in the hands of the firm, the same shall not be charged to tax in the hands of the individual-working partner. In the given case, the remuneration to the working partner is quantified as 0.75% of sales of the firm. Thus, assuming that the remuneration to working partner is entitled to deduction in the hands of the firm, the entire sum of Rs. 90,000 shall be chargeable to tax. WN 3: Computation from income from other sources Interest on Bank FD - Gross (including TDS) Pension from LIC Income from other sources Rs. 50,000 24,000 74,000 WN 4: Deduction under Chapter VI-A Sec. 80C: Premium paid restricted to 10% of Sum Insured Sec. 80CCC: Pension Fund Sec. 80D Medical insurance premium Total Rs. 20,000 70,000 22,000 1,12,000
WN 5: Depreciation on car and Machinery 1. Depreciation on Car WDV as on 01.04.2017 Depreciation @ 15% Depreciation allowable restricted to 4/5 th as per Sec 38 - (45,000 x 4/5) (1/5th is disallowed being personal in nature - Section 38) Rs. 3,00,000 45,000 36,000 2. Depreciation on machinery Rs. Rs. Opening WDV as on 01.04.2017 Additions put to use 6,50,000 > = 180 days On 23.09.2017 - Not eligible for depreciation - See Note 2 below On 12.04.2017 - Not eligible for depreciation - See Note 2 below < 180 days On 12.11.2017 - Paid by Online Transfer, hence eligible 2,00,000 1,25,000 3,25,000 3,00,000 Normal Depreciation Depreciation at 15% on Rs. 6,50,000 (used > = 180 days) Depreciation at 7.5% on 3,00,000 (used less than 180 days) Enhanced depreciation (not eligible on second hand asset) Purchased on 12.11.2017 (< 180 days) = 3,00,000*10% Total Depreciation for the year u/s 32 on machinery 97,500 22,500 30,000 1,50,000 Total Depreciation on Car and Machinery = 1+2 = 36,000+1,50,000 = Rs 1,86,000 Note 2- As per second proviso to section 43(1), the expenditure for acquisition of asset, in respect of which payment to a person in a day exceeds Rs 10,000 has to be ignored for computing actual cost, if such payment is made otherwise than by way of A/c payee cheque/ bank draft or ECS. Accordingly, depreciation on second hand machinery purchased on 12.4.2017 and on new machinery purchased on 23.9.2017 is not allowable since the payment is made otherwise than by A/c payee cheque/a/c payee draft/ ECS to a person in a day
2. (a) The CBDT has, vide a circular, clarified that that salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer. In the given case, Mr Andrew, a non-resident works for DHL Limited, an Indian Company, which is engaged in the shipment of cargo across the world. Mr Andrew maintained an NRE account with SBI into which his salary was credited every month. Since the ship was never docked in India, it can be said that no service was rendered in India. Therefore, as per the circular issued by CBDT, the salary credited shall not be taxable in India. (b) (i) Section 139AA requires every person who is eligible to obtain Aadhar Number, to mandatorily quote Aadhar Number or Enrolment ID of Aadhar application form, on or after 1st July, 2017 in the return of income. In the given case, the return of income by Ms Annapoorna cannot be filed for AY 2018-19 without quoting Aadhar Number or enrollment ID. In case Ms Annapoorna has not yet received the Aadhar Number, she may file the return of income with the Enrollment ID. Therefore, either Aadhar Number or Enrollment ID is mandatory to file the return of income of Ms Annapoorna and the return cannot be filed merely with her Permanent Account Number (PAN) (ii) The provisions of section 139AA relating to quoting of Aadhar Number would not apply to an individual who does not possess the Aadhar number or Enrolment ID and is: (a) residing in the States of Assam, Jammu & Kashmir and Meghalaya; (b) a non-resident as per Income-tax Act, 1961; (c) of the age of 80 years or more at any time during the previous year; (d) not a citizen of India. 3. (a) The analysis of the various receipts and the taxability of the same are given below: (a) Received Rs 20 lakhs from a non-resident for use of patent for a business in India. Taxable - Amount of Rs 20 lakhs received from a non-resident is deemed to accrue or arise in India by virtue of Section 9, since the patent was used for a business in India. Therefore, the amount is chargeable to tax in India.
(b) Received foreign currency equivalent to Rs 15 lakhs from a non-resident Indian for use of know-how for a business in Sri Lanka and this amount was received in Korea. Not Taxable - Foreign currency equivalent to Rs 15 lakhs received in Korea from a non-resident for use of know-how for a business in Sri Lanka is not deemed to accrue or arise in India as per Section 9, since it is in respect of a business carried on outside India. Also, the amount was received outside India. Therefore, the same is not chargeable to tax in India. (c) Received Rs 7 lakhs from RR Ltd., an Indian company as fees for providing technical services in India. Taxable - Amount of Rs 7 lakhs received from RR Ltd., an Indian Company, is deemed to accrue or arise in India by virtue of Section 9, since it is for providing technical services in India. Therefore, the same is chargeable to tax in India. It does not matter where the amount is received. (d) Received Rs 5 lakhs from R & Co., Mumbai, resident in India, for conducting the feasibility study for a new project in Nepal and the payment was made in Nepal. Not Taxable - Amount of Rs 5 lakhs received in Nepal from R & Co., a resident, for conducting feasibility study for the new project in Nepal is not deemed to accrue or arise in India as per Section 9, since such study was done for a project outside India. The amount was also received outside India. Therefore, the same is not chargeable to tax in India. (e) Received Rs 8 lakhs towards interest on moneys borrowed by a non-resident for the purpose of business within India. Amount was received in Korea. Taxable - Amount of Rs 8 lakhs received in Korea towards interest on moneys borrowed by a nonresident for the purpose of business within India is deemed to accrue or arise in India by virtue of Section 9, since money borrowed was used for the purpose of business in India. Therefore, the same is chargeable to tax in India. (b) The statement given is NOT CORRECT As per Section 139(5), after an original return has been filed either u/s 139(1) or 139(4), a revised return may be filed within the end of the relevant assessment year or before the completion of the assessment, whichever is earlier, if the assessee discovers any omission or mistake therein. Hence, if an assessment has not been completed, the assessee has time until the end of the Assessment Year to file a revised return. If an assessment has been completed before the end of the Assessment Year, the assessee cannot file a revised return beyond that date. Therefore, the statement given is not correct for AY 2018-19 and onwards. (c) As per Section 10(12B), Payment from the National Pension Systems Trust to an employee on partial withdrawal out of pension scheme referred to in Sec 80CCD is exempt to the extent of 25% of the contribution made by him. Hence, the taxability on partial withdrawal will be as follows: Rs Amount withdrawn (partial withdrawal) 1,00,000 Less: 25% of Mr Srinivas' contribution (25%*2,00,000) (50,000) Amount taxable in his hands 50,000
4. (a) Mr Adam can declare income u/s 44AD, since he is an individual & his turnover from business does not exceed Rs 2 crore and he has not maintained his books of accounts. Income u/s 44AD is computed as follows: 1. A/c Payee Cheque at 6% 1,00,00,000*6% 6,00,000 2. NEFT (electronic means) at 6% 15,00,000*6% 90,000 3. Balance at 8% 35,00,000*8% 2,80,000 Income u/s 44AD 9,70,000 (see note) Basic Tax on above = 2,50,000*5% + 4,70,000*20% = 1,06,500 Add: Education Cess at 3% on above tax = 3,195 Final Tax Payable 1,09,695 Final Tax Payable rounded off 1,09,700 As per Section 44AD, if an assessee declares income as per the provisions of that section, he needs to pay advance tax on or before March 15th of the Previous Year. Therefore, Mr Adam should pay advance tax of Rs 1,09,700 on or before March 15, 2018 (assuming no taxes have been deducted under TDS provisions) Note: Mr Adam can offer income at 6% of gross receipts/turnover if the same has been collected by means of Account Payee Cheque, Account Payee Draft or Electronic Means through a Bank Account on or before the date of filing of return of income u/s 139(1). The balance (since he follows mercantile basis) would be at 8%. (b) A film artist is a notified professional under rule 6F. Since Radhika is a film actress, she may declare her income u/s 44ADA at 50% of gross receipts or turnover for AY 2018-19. Gross receipts 20,00,000 Income u/s 44ADA 10,00,000 (50% of 20 lakh) Basic Tax on above = 2,50,000*5% + 5,00,000*20% = 1,12,500 Add: Education Cess at 3% on above tax = 3,375 Final Tax Payable 1,15,875 Final Tax Payable rounded off 1,15,880 The above tax has to be paid in the form of Advance Tax on or before March 15th, 2018 fully. Otherwise 234C would be applicable
(c) As per Section 47, a transaction involving conversion of Preference Shares into Equity Shares is not a "transfer". Hence, there is no capital gains in respect of the same. However, when the assessee sells the equity shares subsequently, in the previous year in which the sale of the equity shares is made, the capital gains tax would be attracted. The cost of acquisition of equity shares can be taken as cost of acquisition of the preference share. The period of holding would be calculated considering the period of holding of both equity as well as preference share. The indexation of the cost would be given from the year of acquisition of preference share. 5. (a) The applicability of TDS for the following transactions are stated below: a. Rent of Rs 60,000 paid for the months from June 2017 to March 2018 by Mr Anand, a salaried employee. As per Section 194IB, any person, being an individual or a Hindu undivided family (other than those covered u/s 194-I), responsible for paying to a resident any income by way of rent exceeding Rs 50,000 for a month or part of a month during the previous year, shall deduct an amount equal to 5% of such rent in the last month of the year or last month of tenancy, if vacated during the year. Since Anand is a salaried employee, he cannot be covered by the provisions of Section 194-I. Total rent paid in this case = 60,000*10 = Rs 6,00,000 Assuming house is not vacated, TDS at 5%*6,00,000 = Rs 30,000 to be reduced from last month's rent u/s 194IB. b. Payment of Rs 1,00,000 made to In-voice Call Center Pvt Ltd by ABC Ltd As per Section 194J, TDS at 2% to be made on payment made to a call center exceeding Rs 30,000. Hence, TDS = 2%*1,00,000 = Rs 2,000 c. Payment under a Joint Development Agreement (JDA) of Rs 10,00,000 to Mr A, who had entered into a JDA with Prestige Builders Ltd (2 flats of the value of Rs 30,00,000 lakh were also handed over to Mr A) As per Section 194-IC, any payment (not being payment in kind) made under a JDA shall be liable to tax at 10% on the amount paid. The SD value of flats given need not be considered as it is payment in kind. Hence, TDS = 10%*10,00,000 = Rs 1,00,000
(b) Rs Rs I. Income from Salaries 1,00,000 II. Income from Business 2,00,000 Less: Loss under House Property -restricted to (2,00,000) NIL III. Capital Gains Long Term Capital Gain 50,000 Less: Short Term Capital Loss - restricted to (50,000) NIL IV. Income from other sources Interest on fixed deposits 20,000 Gross Total Income 1,20,000 Summary of losses that can be carried forward Loss under House Property Rs 1,00,000 for 8 AY's - can be set-off against Income from HP Loss from Speculation Rs 2,50,000 for 4 AY's - can be set-off against speculation income Short Term Capital Loss Rs 50,000 for 8 AY's - can be set off against any capital gain 6. (a) Computation of Total Income of Mr. Shyam Rs. Rs. Income from Salaries (WN-1) Income from Other Sources (Interest on savings bank) Gross Total Income Less: Chapter VI-A deductions: Sec 80C - Tuition Fees for 2 children (restricted to Rs 1,50,000) Sec. 80D - Medical insurance premium (Note 1) Sec. 80TTA - Interest on Savings Bank (Note - 2) Total Income 1,50,000 25,000 10,000 4,88,800 12,000 5,00,800 (1,85,000) 3,15,800
Working Note 1 - Income from Salaries Rs Rs 1. Basic Salary (Rs 30,000*12) 3,60,000 2. Dearness Allowance (30%*3,60,000) 1,08,000 3. Transport Allowance (Exempt up to Rs 1600 pm) = (1800-1600)*12 2,400 4. Motor Car Perquisite (Car owner and driven by employee) Amount spent by employer 40000 Less: Since engine is less than 1.6 litres, Rs 1,800 p.m -21600 18,400 5. Expenditure on accommodation in hotels on official duties NIL 6. Lunch provided by the employer during office hours (as it does not exceed Rs 50 per meal if 300 days are considered as working days) NIL 7. Computer kept by the employer in the residence NIL Taxable Salary 4,88,800 Note 1 Medical insurance premium otherwise than by way of cash would only be allowed as deduction. Hence, only premium paid by cheque would be deductible ie., Rs 22,000 Expenditure on Preventive health check up restricted to Rs 5,000 (payment made in cash would also qualify for deduction) Hence, total eligible amount u/s 80D = 22,000 + 5,000 = Rs 27,000. However, if we assume that Mr Shyam is less than 60 years old, maximum deduction available is only Rs 25,000. Therefore, only Rs 25,000 has been claimed. Note 2 Interest on savings bank account eligible for deduction up to Rs 10,000 u/s 80TTA. (b) In the hands of Mr Xavier - Under Capital Gains Rs Rs Full Value of Consideration 1,000*500 5,00,000 (Note 1) Less: Cost of Acquisition 1,000*350 (3,50,000) (Note 2) Short-Term Capital Gains 1,50,000 (Note 3) Note 1 - As per Sec 50CA, if the transfer of an unquoted shares is made at less than its FMV, FMV shall be deemed as Full Value of Consideration. Therefore, in this case, since actual sale price of Rs 460 per share is less than FMV of Rs 500 and the share is that of a private company, Rs 500 per share has been deemed as Full Value of Consideration.
Note 2 - At the time of acquisition, Mr Xavier had paid Rs 200 per share when the FMV was Rs 350 per share. Due to this, he would have been taxed under "Income from Other Sources" w.r.t Rs (350-200)*1,000 under Section 56. As per provisions of Section 49 read with Section 56, Mr Xavier can now take the cost of acquisition as Rs 350 per, the FMV at the time of receipt. Note 3 - Since the share is an unlisted share and it has not been held for more than 24 months from date of acquisition, it is a Short-Term Capital Asset, hence the gain is a Short-Term Capital Gain. In the hands of Mr Zain - Under Income from Other Sources The difference between FMV and Purchase price is Rs 40*1,000 = Rs 40,000 (Inadequate consideration) As the difference between purchase price and FMV does not exceed Rs 50,000, no taxability under Income from Other Sources for Mr Zain. 7. (a) Rs Full Value of Consideration (Note 1) 47,25,000 Less: Expenses on transfer (Rs 37,50,000*1%) (37,500) Net Consideration 46,87,500 Less: Indexed Cost of Acquisition (8 lakhs*272/100) (Note 2) (21,76,000) Less: Indexed Cost of Improvement (Note 3) NIL Gross Long Term Capital Gains 25,11,500 Less: Exemption u/s 54 (to the extent of investment in Residential House) -2,00,000 Less: Exemption u/s 54EC (to the extent of investment in REC Bonds) -2,00,000 Taxable Long Term Capital Gains 21,11,000 Note 1 - As per Section 50C, the Stamp Duty value will be the Full Value of Consideration if it is greater than the selling price. In this case, Stamp Duty Value is Rs 47,25,000 and the selling price is Rs 37,50,000. Hence, Stamp Duty Value has been considered (Valuation Officer's value of Rs 47,50,000 has been ignored as it is greater than the Stamp Duty Value) Note2 - Since the FMV on 1.4.2001 Rs 8 lakh is higher than actual cost of house acquired before 1.4.2001 Rs 5 lakh, the assessee can choose Rs 8 lakh as the cost of acquisition. Note 3 - Indexed Cost of Improvement incurred before 1.4.2001 cannot be taken as deduction
(b) This issue has been examined by the CBDT and it has been clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide Section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific provision for exemption of such compensation in the Income-tax Act, 1961. Hence, Mr A is right in claiming that the amount of Rs 10 lakh received by him as compensation for compulsory acquisition of his urban non-agricultural land under the RFCTLARR Act is exempt even though there is no specific section under the Income tax Act, 1961.